A stock split occurs when a company divides existing shares into multiple shares. Technically, stock splits don't change the value of a company or the interests of their investors.
However, this strategy lowers the price of individual stocks, which can make a stock more accessible to retail investors, especially when the price of stocks reaches a level considered too high for retail investors.
A lower share price can make the stock more attractive to a wide variety of investors, not all of whom can afford a share of $ 1,640 in the case of an electric automaker like Tesla. (NASDAQ :).
The rise in Tesla shares since the company announced a stock split shows the growing influence of retail investors in the market where large institutional investors have taken a backseat since the COVID-19 pandemic.
Tesla announced early this week that it would split its shares in a 5-for-1 exchange, a move intended to make the stock cheaper after it rose 300% this year. Tesla shares closed 13.12% higher on Wednesday as investors continued to rise after the stock split news. Yesterday, the stock gained just over 4.2% again and closed at $ 1,621.00. Tesla will begin trading on a split-adjusted basis on August 31.
At some point last month, nearly 40,000 Robinhood account holders added stock of the automaker over a four-hour period. The increase has been a boon to other electric car companies, some of which have not yet produced a car.
"The stock split is an acknowledgment that the market is increasingly influenced by individual investors, including those seeking exposure to next-generation transportation," said Ben Kallo, an analyst at Robert W. Baird who told Tesla assesses. the equivalent of a hold, in a note carried by Bloomberg. coveted. The carmaker was eligible for an S&P 500 slot after making a profit for four consecutive quarters. When that happens, the stock becomes a must buy for mutual and exchange traded funds that want to mimic the benchmark index. At least $ 1.6 trillion in mutual and exchange traded funds track the S&P, according to Morningstar Direct data.
For long-term investors who buy stocks based on their fundamental strength, we don't think this is a good time to buy Tesla stock. The shopping frenzy fueled by the home environment has made Tesla valuation nearly impossible to justify.
Tesla stock is now trading at 217 times estimated 12-month earnings, versus 14 times for General Motors (NYSE: NYSE :). The automaker's market cap of $ 306 billion is more than the value of Toyota (NYSE 🙂 and Ford (NYSE 🙂 combined.
When it comes to making a profit, it is also worth noting that Tesla is not making more money by selling more cars.
Wall Street Journal reporter Charley Grant explains:
"Total sales were even down 4% from a year earlier. In addition, the company's sales included $ 6 billion including $ 428 million in regulatory credit sales to help rival manufacturers meet issuing commitments. These credit sales are essentially pure profit, accounting for more than 100% of the company's operating income. A year ago, Tesla posted $ 111 million in second-quarter credit sales. "
In fact, Tesla has barely increased its revenue since the fourth quarter of 2018. Without zero-emission vehicles (ZEV) and other regulatory credits, Tesla would not have been able to report a fourth straight quarter of GAAP profitability.
Bottom Line
Tesla stock benefited from the stock split mainly because it lowers the bar for small investors. But that move doesn't change the fundamentals and valuation of the company, which is difficult to justify when his car company's sales aren't increasing.
